AIQ Spring 2019

Q U A R T E R LY

ALTERNATIVE INVESTMENTS QUARTERLY

SPRING 2019 VOLUME 13 ISSUE 1

Will QOFs Cannibalize the 1031 Industry?

QOFs and 1031s This Year, Next Year and Beyond I 2018 Non-Traded Retail Energy Report I Around the Industry Update Q&A I ADISA News

Q U A R T E R LY

SPRING 2019 VOLUME 13 ISSUE 1

1 — Executive Director’s Letter

ALTERNATIVE INVESTMENTS QUARTERLY

A Banner Year!

Peter Magnuson I Ladenburg Thalmann

4 — Will Qualified Opportunity

Funds Cannibalize the

1031 Industry?

CONTACT INFORMATION ADISA I 10401 N Meridian St., Suite 202 I Indianapolis, IN 46290 Direct: 317.663.4180 I Toll Free: 866.353.8422

The year 2018 was a banner year for ADISA! In membership, in advocacy, and of 12 — 2018 Non-Traded Retail

course in events, we set records and boasted records. Our hard work, our Board of

Directors, and, yes, our democratic business model and more proved up to the task

Energy Report

Fax: 317.815.0871 I E-mail: adisa@adisa.org John Harrison I Executive Director I 317.663.4172 Tanisha Bibbs I Director of Event Planning I 317.663.4174

of fueling this impressive growth.

22 — Around the Industry

Update Q&A

Jennifer Fitzgerald I Director of Marketing I 317.663.4175 Tony Grego I Associate Executive Director I 317.663.4173

A Banner Year!

By John Harrison, Executive Director, ADISA

ADISA EDITORIAL BOARD Chair I Brandon Raatikka I FactRight, LLC

Executive Director’s Letter

First, in membership, we completely a months-long clean up and purge of our database—cleaning up inactive complimentary memberships—and still grew over 3% from 2017. And what’s even better is that

26 — ADISA News & Events

our Associate Members (BD, RIA, Family Offices, Reps and advisors) grew to be almost 70% of our

Erin Balcerzak I Member Services Coordinator I 317.663.4183

4500 members. Our number of company members grew from 600 to 700, and our Sponsor and Affiliate

Design I DesignMark I Susie Cooper

membership expanded into new categories: crowdfunding, Opportunity Zones, data analytics, office

adisa.org

and custodial support and more.

Secondly, our advocacy efforts were second to none in protecting and fostering success for

Copyright © 2019

our industry: coalition-based activities on 1031, state work (NJ) on the Fiduciary Rule, work with

By ADISA (Alternative & Direct Investment Securities Association),

the Treasury Department and the IRS, letters to California state (on Bill 2529), the SEC on RBI and

formerly REISA, formerly the Tenant-In-Common Association.

All rights reserved. Readers may copy sections of this publication for personal use. However, it is a violation of U.S. copyright laws to copy substantial portions of the publication for any reason without permission. The Copyright Act of 1976 provides for damages for illegal copying. If you wish to copy and distribute sections of this publication, contact Jennifer Fitzgerald at jfitzgerald@adisa.org.

accredited investor definition, and FINRA on 18-08 plus interviews printed in the Wall Street Journal in defense of private equity. Thanks to all on our L & R Committee who helped move these efforts forward in designing and reviewing our communications (Catherine Bowman—chair, John Grady, Deb Froling, Larry Sullivan, and our own “man-in-DC”, Tom Rosenfield). Most amazing is the efficiency and economy with which we accomplished these tasks: the ROI on our efforts is something to be proud of, and all who have viewed our expense numbers agree we get incredible bang for our buck.

And now we come to events, our specialty. 2018 set a new standard for us. We saw a strong Spring Conference in Orlando with the strongest quality marks yet. The summer event in New York set an attendance record—not bad for our first foray there. And what can I say about the Annual Conference in

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What I’m most proud of though

Get Educated.

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is the strength of our Board of Directors. First, it’s very difficult to get on ADISA’s Board; it is not a do-nothing resume builder, but instead a dynamic group who truly roll up their sleeves to tackle industry problems and grow the organization.

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Diversification strategies for private wealth advisers

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Vegas—a crowd of over a thousand (1,011 to be exact) with about half of them BD/RIA/FO/Reps/Advisors.

That’s an impressive crowd to see close to 80 exhibits, 30+ breakout sessions, and some unforgettable general sessions. This, we can all be very proud of.

What I’m most proud of though is the strength of our Board of Directors. First, it’s very difficult to get on ADISA’s Board; it is not a do-nothing resume builder, but instead a dynamic group who truly roll up their sleeves to tackle industry problems and grow the organization. It’s no wonder they’re smart and committed—risking one’s self in an election, agreeing to serve the group’s interest beyond one’s own, and commitment of time—means only those with wisdom and dynamism become our leaders.

I began with a quick review of our successes including an “and more”. One of the “and more” projects is this very magazine, AIQ, meant to inform the industry, and another is our research and academic outreach efforts. If the business schools learn about our segment of the industry, then more sales will result in the future. I am fortunate to have ADISA sponsor me in some direct research, and research skills have

Provides actionable information on the real assets class. Real Assets Adviser covers the entire spectrum of real assets, including real estate, infrastructure, energy and commodities/precious metals. This publication is free for RIAs, IBDs, wealth managers and family offices.

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When his Major League dreams did not pan out, Rick Buoncore of MAI Capital Management went on a hitting streak in the financial services field

Private debt funds

It has been a heady decade for non-bank lenders, and the opportunities have attracted a crowd

Real assets investing

The market remains strong and real estate is among the assets that performed well globally

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What will it take to attract the next generation of advisers to the private wealth business?

Sponsorship: Our Sponsorship packages are a consultative engagement that include a robust offering of digital and print advertising as well as a seat at our exclusive, invitation-only annual editorial advisory board meeting.

already been put to work to support our L & R efforts and literature to support our advocacy efforts during 2018. Speaking of recent literature, we are adapting our Like-kind Exchange brochure originally designed for educating Capitol Hill for general use by the advisor population.

ADISA’s banner 2018 year involved the leadership of many. Hats off to our 2018 president, Keith Lampi, and his Board who oversaw this progress with energy, steadfastness, and collegiality. And thanks to all of ADISA’s membership for your interest, your hard work, and of course, your attendance. What a great year for our organization!

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To learn more about these products and how Real Assets Adviser can work with you, contact:

Jennifer Dohrmann-Alpert

Managing Director, Real Assets Adviser jda@irei.com +1 925 244-0500, ext. 134

REALASSETS ADVISER

2274 Camino Ramon, San Ramon, CA 94583 USA www.irei.com • Ph: +1 925-244-0500

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Will Qualified Opportunity Funds Cannibalize the 1031 Industry?

By Evan Hudson, Mayer Greenberg and Brian Senie; Stroock & Stroock & Lavan LLP

QOFs and 1031s this year, next year and beyond.

Qualified Opportunity Funds (“QOFs”) are a hot topic right now. In December 2017, Congress introduced Qualified Opportunity Zones (“QOZs”) into the Internal Revenue Code, and the Treasury Department released proposed regulations in October 2018.

Many of the QOZ benefits are time-sensitive, so investors are already thinking about how to take advantage of the QOZ rules, and many sponsors have begun forming QOFs. The general idea is fairly straightforward: if, within 180 days of a sale, an investor reinvests the sale proceeds into a QOF entity that acquires qualifying property within a QOZ (a designated census tract, as further described below), then the investor’s immediate taxable gain is deferred and major tax benefits start kicking in after five, seven and ten years.1

The main benefits of QOFs are trifold: • deferral (potentially until 2026) of tax on capital gain that is reinvested into a QOF; • reduction in the amount of gain ultimately subject to tax after holding the QOF interest for five years or, even better, seven years; and • for an investor holding a QOF interest for ten years or more, the elimination of tax on any appreciation in the interest’s value after its acquisition.

No doubt, there are some great tax savings to be had, especially if the underlying investment significantly appreciates in value.

But, as readers of AIQ are well aware, QOFs are not the only tax-advantaged strategy on the street. Sponsors have been syndicating Delaware statutory trusts (“DSTs”) for years. Ever since the

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IRS issued Revenue Ruling 2004-86 almost 15 years ago, DSTs have been treated as valid for purposes of so-called “1031 exchanges” (or “1031s”) under Section 1031 of the Internal Revenue Code, and have served as the vehicle of choice for investors desiring to relinquish legacy real estate investments (often directly held, labor-intensive and sub-institutional-grade) in exchange for other real estate assets, typically professionally managed, completely passive and institutional-grade, without recognizing gain.2 According to Mountain Dell Consulting, the DST industry is on track to raise over $2 billion from retail investors in 2018, the magnitude of the market almost reaching its pre-crisis levels.3 Both QOFs and DSTs offer investors potential deferral of taxation on capital gains. Both promise access to economically attractive assets selected and managed by expert sponsors.

Sponsors, financial advisors and investors are asking whether the retail market is big enough to support

Both QOFs and DSTs offer investors potential deferral of taxation on capital gains. Both promise access to economically attractive assets selected and managed by expert sponsors.

both syndication strategies. Or, we are often asked, are QOFs primed to cannibalize the 1031 industry?

Having studied the issues, we believe that the market will support both products.

Going out on a limb, we predict that while QOFs are likely to take some market share, the products are different enough that QOFs will not replace 1031s in coming years.

The reason is that QOFs and 1031s each come with certain advantages and disadvantages, which we set forth below. Accordingly, a financial advisor, after making a suitability determination for a given client, will likely decide to allocate that client’s assets to one type of product over the other, or some maybe to both, based on the client’s circumstances, needs and goals.

To show how this might work in practice, below we present nine hypothetical scenarios that a client might bring to a financial advisor, and how that financial advisor might begin to think about the differences between QOFs and 1031s. Of course, no single circumstance should be considered in isolation from all the circumstances facing a client. Also, we are not giving legal advice, so again we stress that each client scenario, and each “advantage” determination, is hypothetical. But we think the format presented below is useful.

Additionally, we hope to give sponsors some insight as to how their syndicate members may be approaching the issues, and accordingly, which way the market may be headed.

1.

The client didn’t dispose of a real estate asset, but stock, or maybe a different kind of asset.

Advantage: QOF (not even a close call) This one is easy, and the answer is clear. An investor may roll any capital gain into a QOF.4 In fact, it was tech entrepreneurs—a group often looking to exit stock-investments in a tax-advantageous way—who pushed for the QOZ legislation to begin with. Proceeds from the sale of stock are not eligible for 1031 rollover—the gain must be from the sale or exchange of real property. So, when a client disposes of shares of her private software company (or roofing business, or waste management enterprise … )—or perhaps a publicly traded stock, bond or mutual fund—absent unusual circumstances, a 1031 should not even be on the table.

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2.

replacement property would need to have similar debt and basis to avoid boot, and would accordingly itself have

The client prefers to invest in a proven real estate market.

debt in excess of basis). A QOZ investment, however, may only be made to the extent of the cash available and accordingly might not be able to cover the entire amount of the gain recognized—although an investor could

Advantage: 1031 If an investor wants to invest in a proven real estate market, a 1031 may be the way to go. In a 1031 deal, the replacement property may be located anywhere in the U.S., and there are no restrictions on what kind of neighborhood the property sits in. Although the replacement property must be “like-kind” to the relinquished property, typically most real property can potentially qualify. Perhaps even more importantly, replacement

invest the remaining cash from his own funds in order to receive QOZ benefits on the full gain amount.

4.

The client insists on permanent tax deferral.

property in a 1031 exchange may be “mature” property that is already in service, whereas this is more difficult

Advantage: 1031

in the QOZ context as discussed below.

A 1031 exchange replaces one property with another of like kind, such that the new property is essentially

QOF benefits are available only for properties within the designated QOZs—certain low-income communities

treated as a continuation of the old—with the same tax basis, depreciation period and other tax attributes.

(defined as census tracts with poverty rates of at least 20% and meeting certain requirements regarding median

A consequence of this is that once the exchange is completed, the investor may continue to hold the new

family income) that are designated by each state, on a state-by-state basis. Although QOZs exist in all 50 states,

property indefinitely without any pending taxable event.

and many will probably prove to be high-growth markets in future years, a QOZ is almost by definition not a proven real estate market. Additionally, qualifying QOZ property must generally either be newly placed in service by the QOF or substantially improved by the QOF—accordingly, it is difficult for a QOF to acquire pre-existing “proven” assets.

The QOF rules, however, do not provide permanent deferral of taxable gain. This is why the advantage, for pure tax deferral, goes to the 1031 product.

An important caveat is that QOFs do offer the potential for permanent reduction of the gain subject to tax.

Specifically, the QOZ rules reduce the amount of gain ultimately subject to tax by 10% after a five-year hold

3.

and an additional 5% after a seven-year hold. (Thus, after a seven-year hold, tax is owed on only 85% of

The client wants to take some money off the table upfront tax-free.

Advantage: QOF, if there is cash in excess of the amount of gain

the initial rollover gain.) But this gain is nevertheless included in income no later than December 31, 2026, and accordingly, investors should expect to pay tax at that time. However, an investor wishing to liquidate the investment regardless may enjoy a reduction in tax owed that would be unavailable in the 1031 context.

Additionally, the QOZ rules provide a special additional benefit whereby an investor holding ten years or more

In a 1031 deal, if, as part of the exchange, the investor extracts cash proceeds from the sale of the

recognizes no additional gain on subsequent sale. Thus investors planning on a long-term hold but eventual sale

relinquished property (and does not use such cash to acquire replacement property in the exchange), the

may derive significant benefits from the QOZ rules above and beyond the deferral of the initial taxable gain.

investor must pay tax on that amount (known in tax parlance as the “boot”). This is because of the “over or up” rule providing that, for a 1031 exchange to be completely tax-free, the replacement property must be of equal or greater value than the property relinquished. Although cash may be extracted later on by means of a refinancing, as is common in the real estate world, this nevertheless may add complications—potentially including both tax risk and economic risk.

Under the QOZ regime, on the other hand, the investor need not roll over 100% of the proceeds from

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The client prefers proven investment strategies over novel ones.

Advantage: 1031

the sale of the property, but only the portion that represents taxable gain. In other words, the portion

1031 exchanges have been a staple of the market for a long time, whereas QOF investments are novel.

representing the basis in the property may be withdrawn tax-free—a nice way to experience a mini-liquidity

Accordingly, the latter come with significant uncertainty even following the issuance of the proposed

event before rolling over the gain. Granted, some assets will have been depreciated to zero already, but if

regulations. In particular, whereas 1031 exchanges are fundamentally real property transactions, the QOZ

there is basis to be had, the QOF regime allows the investor to extract it.

regime involves investment into QOFs, entities subject to requirements that may affect or restrict the structure

Conversely, however, if the property being sold by an investor is subject to debt in excess of its tax basis—i.e.,

and operation of any acquired properties. Practitioners are still awaiting guidance clarifying the nuances of

if there is taxable gain in excess of the cash received by the investor—then a 1031 may have the advantage. A

these tax rules, and the ultimate guidance on these points may have either a positive or negative influence

1031 exchange would permit tax-free reinvestment into a replacement property in this scenario (although the

on the desirability of QOZ structures as an alternative to 1031s.5

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6.

The client’s rollover funds are coming from a partnership.

We believe that

Advantage: QOF In a 1031 exchange, the same taxpayer that disposed of the relinquished property must be the

interest in QOFs may slightly cool

one that acquires the replacement property—a technicality that has bedeviled a generation of tax

the market for 1031s, which has been

planners and frustrated the many investors who invested in real estate through a partnership or other pass-through entity only to have some (but not all) of the partners wish to proceed with a

burning quite hot for several years now.

1031 exchange.

In the QOZ context, though, a partnership or other pass-through entity may pass recognized gains through to its partners, who may then reinvest those gains as if they had recognized them directly.

Additionally, while both 1031s and QOZs require investors to reinvest their proceeds within 180 days, the QOZ regime provides some additional leeway for investors reinvesting gains recognized through a partnership: such investors may have their 180-day period begin at the end of the partnership’s taxable year, rather than on the date of the sale. Thus not only is selling through a partnership not a barrier in the QOF context, it may actually provide investors additional time to find suitable replacement investments.

As a result, investors whose real property interests are indirectly held may have a significantly easier time getting tax deferral benefits through a QOF.

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8.

The client wants to reinvest in an operating business, not real estate.

1—Stroock Alert. Stroock’s Take on the New ‘Qualified Opportunity Zone’ Guidance.

October 19, 2018.

Advantage: QOF

7.

In a 1031 exchange, not only must the proceeds come from real estate, but the acquired asset must be real

The client does not want to be locked into a single investment for a long time.

Advantage: 1031 QOZ benefits (other than the deferral of taxable gain, which would otherwise be recognized immediately) begin after a five-year hold, with additional benefits after seven years and ten years. Accordingly, a QOZ investor should plan on holding its QOF interest for a significant period of time, or else forfeit the QOZ benefits. The market is still brand-new, but we anticipate that many, if not most, QOFs will set a targeted duration of ten-plus years so as to maximize the potential tax benefits.

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1031 market has shifted towards the DST structure over the past decade, in this

estate as well (although, as noted above, DST interests qualify for this purpose).

article we use the term “DST”

The property acquired by a QOF must be tangible property used in a trade or business. Although this naturally lends itself to real property and the rental thereof, operating businesses—including renewable

as a proxy for the entire 1031 market.

3—Mountain Dell Consulting.

Market Report – Securitized

energy and manufacturing—have also been receiving serious consideration in the market.

1031 Industry – Q2 2018 (as of June 29, 2018).

9.

4—This includes both short-term capital gain and long-term

The client demands the “best” product for his particular tax needs.

capital gain, but “dealer income” and certain types of depreciation “recapture” may not qualify.

Advantage: ???

5—Stroock Alert. Six Burning

to hold the replacement property for at least a year or two before disposing of it, to satisfy the “held

Obviously, this is a trick scenario. If anything, it shows the careful thought that financial advisors must put

Opportunity Zone Guidance.

for investment” requirement, the investor is not otherwise restricted from accepting a good offer on

into their recommendations. It also demonstrates the basis of our prediction that, without a clear “best”

the property. Granted, when investors invest through a DST, it is the sponsor, not the investor, who

product for every single situation, QOFs will not cannibalize the 1031 industry. The differing tax attributes

identification of the replacement

decides when the DST will liquidate. But investors should benefit from the sponsor’s flexibility to sell the

of the two products leave significant room for both of them to sit on the shelves of broker-dealers and

strict escrowing and tracking

underlying asset when the time is right (even if ten years have not passed) without worrying about lost

RIAs. We believe that interest in QOFs—and the unique potential tax benefits they offer—may slightly

not — so there are additional

tax benefits­—although the investors may need to engage in another 1031 at the time of the DST sale

cool the market for 1031s, which has been burning quite hot for several years now. But how much so

to avoid recognizing taxable gain.

is anyone’s guess, and we don’t purport to be smart enough to give a definitive answer to that here.

1031 exchanges, though, are fairly flexible as to their frequency. Although an investor will often want

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2—Because virtually the entire

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Questions on the New Qualified November 6, 2018.

6—In addition, 1031s require property within 45 days, and of sale proceeds. QOFs do procedural ways in which QOFs may be “easier” on investors.

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2018 Non-Traded Retail Energy Report

By Brad Updike, LLM, JD; Mick Law P.C. LLO

Mick Law P.C., based in Omaha, Nebraska, is a specialty firm comprised of full-time and of-counsel attorneys who each possess a concentrated area of expertise and in-depth knowledge. While providing a broad range of legal services to valued clients, Mick Law focuses on two principal areas of practice; broker-dealer and registered investment advisor representation and real estate finance.

Sector Summary For 2018, eight sponsor companies raised about $401 million for use within various non-traded energy programs. That represents a year over year increase of 21.5% from $330 million raised by the sector in 2017, a commendable result after considering the pricing volatility observed in Q4 2018 in the oil market.

For 2018, eight sponsor companies raised about $401 million for use within various non-traded energy programs.

Leading the sector in terms of capital raised was Mewbourne Development Corporation (“Mewbourne”), $116.7 million, which was followed by U.S. Energy Development Corp. (“U.S. Energy”), $100 million, and MDS Energy (“MDS”), $65 million.

Of eight sponsor companies, five reported varying levels of program capital growth from 2017 to 2018 (63% of the sector), with each of these five companies also reporting capital growth for a second consecutive year. This trend compares favorably to what we observed from 2015-2016, in which only two of nine sponsors reported growth in program capital raising year over year.

The biggest mover in terms of raised capital in 2018 was MDS, which doubled its capital raise from $32 million in 2017 to $65 million in 2018. Also deserving of honorable mention was (i) Mewbourne, which increased its annual raise from $78 million in 2017 to $116.7 million in 2018 (i.e., 50% growth year over year), and (ii) Montego Minerals, which increased its capital raise by about $28 million year over year (going from no capital raised in 2017 to funding two programs this year after undergoing a planning and structuring year).

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A chart of the year over year fundraising totals of the eight retail energy sponsors we cover is provided to the right (with U.S. Energy’s numbers reflecting estimated results based upon numbers that were reported in late December 2018).

Four 1031 programs were collectively funded by Resource Royalty and Montego Minerals in 2018. Resource Royalty acquired leased minerals primarily in the north-central Oklahoma STACK/ SCOOP Plays, whereas Montego Minerals acquired leased minerals primarily in the Permian

Company

2018 2017 2016 Raise Raise Raise

Strategy

Mewbourne Drilling-Horizontal Wells

in Permian, Tx Panhandle

and Anadarko Basin

$116.7mm

$78mm

$63mm

MDS

Drilling-Horizontal Wells in Marcellus Shale

$65.5mm $32mm $23mm

APX

Drilling-Mississippian Oil Targets in Illinois Basin

$23.4mm $28mm $18mm

John Henry Oil

Drilling-Trenton Black River Oil Targets in Tennessee

U.S. Energy

Drilling-Horizontal Wells in Eagleford Shale

in 2018. The pace of capital growth in this sector has been steady yet arguably conservative at

Waveland

times over the past four years ($247 million 2015, $300 million 2016, $330 million 2017, and $401

Opportunity Fund Targeting Leases and Upstream Private Equity (Permian Basin, San Juan Play in NM, STACK Play in Oklahoma)

Resource Royalty

1031 Programs Acquiring Minerals and Royalties in STACK Play of Oklahoma

Basin and in East Texas. While 1031 energy capital accounted for about 15% of the total retail energy capital, this asset type did experience fairly significant growth in 2018.

Waveland Energy’s fund raising numbers are primarily comprised of the capital raised within the closing months of Waveland Resource Partners IV. This fund raised about $80 million of retail capital from mid-year 2016 through Q1 2018. Waveland Energy’s opportunity fund program, Waveland Resource Partners V, opened its program late in 2018, will run its offering through December 31, 2019, and is targeting $100 million in raised capital. Waveland Energy reports that 11 firms have signed selling agreements, with an additional 14 firms conducing due diligence at this time.

Perspective Regarding the Future While the size of the retail energy sponsor group remained stable year over year (e.g., eight sponsors in 2018, eight sponsors in 2017, and nine sponsors in 2016), the capital pool increased significantly

million 2018). We believe this trend is due to severe levels of market volatility, coupled with the fact that the sector is endeavoring to regain investor trust that was lost as a result of performance failures by several companies that no longer raise capital in the retail channel.

Despite the challenges, program capital increases have, in fact, been realized within the sector for three consecutive years. We believe that the overall strength of the sponsor group

Despite the challenges, program capital increases have, in fact, been realized within the sector for three consecutive years.

today compared to what was the case ten years ago bodes well for this segment going into 2019 and later years, with the capitalizations and performance level of the present group being better than that of the sector ten years ago (with about 30 companies raising close to a billion

$4.9mm $4.5mm $3.0mm

$100mm $109mm $147mm (estimate)

$33mm $40mm $10mm (second program runs through 2019)

$30mm $28.5mm $9.1mm

Montego 1031 Programs Acquiring $27.9mm $0 NA Minerals Minerals and Royalties in (Planning

the Permian Basin, East Year)

Texas, and in Central Oklahoma

in retail capital in 2008, but with a substantial majority of these companies not achieving their performance goals).

Performance News

2018 Totals by Strategy

In addition to sharing its capital raise numbers, Mewbourne, APX, and Resource Royalty provided

Drilling.............................. $290.1 million (70%)

us with performance reports in relation to a number of operational investment programs.

Opportunity Funds.......... $53 million (13%)

As MDS also recently shared distribution information, we have added that to our report.

Note that due to well depletion, distributions in later years will be lower compared to

Minerals/Royalties........... $57.9 million (15%, up from $28.5 million in 2017)

earlier years when a well tends to produce most of its oil/gas. A more complete explanation of each sponsor’s performance will be provided in our upcoming sponsor due diligence opinions this year.

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Market Outlook

A summary of the information is provided below:

By analogy, the 1031 real estate asset class went through restructuring and came back from

Mewbourne

about $250 mm in 2009-2010 to $1.3 billion in 2016, to $1.75 billion in 2017, and to about $2

Cumulative Program Cash on Cash

Trailing 12 Months

Observation: The performance of these

billion in 2018.

programs illustrates: (i) the advantages of

In contrast, we continue to anticipate a “slow climb” back to pre-2015 raise numbers (i.e.,

MEP 2014.......................64%..............12.51%

pursuing a multi-year drilling schedule as

$800 million), as oil prices remain uncertain but with a few indicators suggesting that oil/gas may

MEP 2015.......................70%..............19.26%

opposed to playing the IDC game; and

be poised to rebound to some extent (i.e., due to OPEC production cuts).

MEP 2016.......................69%..............43.32%

(ii) the value of putting cap. ex. to work

MEP 2017.......................24%...................24%

when AFE prices are lower versus higher.

The following market information was derived from a number of informational sources:

Oil – In 2018, West Texas Intermediate (“WTI”) crude oil spot prices averaged $65 per barrel

APX Energy

(“bbl”), up $14/bbl from $51/bbl in 2017, and up $18/bbl from $47/bbl in 2016.

The New Harmony—C drilling program, which raised approximately $15.561 million in 2016,

WTI’s average of $65/bbl in 2018 outperformed the EIA’s forecast of $58/bbl. Reasons for the

returned 47% cash on cash through December 2018 (17 distribution months, 34-well program).

outperformance would appear to include: (i) OPEC’s general cooperation with output quotas; (ii)

The initial year federal income tax deduction for the New Harmony—C drilling program was

world GDP/demand; and (iii) a weaker U.S. Dollar through much of the first six months of 2018

reported to be 77% of the invested capital.

(i.e., 0.80-0.84 to $1 conversion rate observed in the first six months of 2018).

Observation: APX/Campbell Energy’s strategy to focus in the north part of the New Harmony fault system appears to be working based upon early distributions from the 2016 program.

to 1 conversion rate observed in the later months of 2018); (ii) a reduction in oil demand due to a feared economic slowdown in world GDP; and (iii) a sentiment that OPEC’s output quotas will

The performance of six direct title programs were reported as follows: Well Count

the past two months. The West Texas Intermediate spot price as of January 2, 2018 was $47.34 per bbl. Reasons for recent downward price pressure include (i) a stronger U.S. Dollar (i.e., 0.88

Resource Royalty

Program

Despite upward pricing movements in 2018, oil prices have come down significantly over

Start Date 12-Month Trailing Return

Observation:

not keep pace with U.S. shale oil production.

In its December 2018 outlook, the EIA forecasted Brent spot prices to average $61/bbl in

Preston Fisher..................33......... Q4 2016.................................11.39%

Well counts rising

Blaine Fisher....................29......... Q2 2017...................................5.25%

in programs with

King Woods.....................28......... Q3 2017.................................11.88%

an Anadarko

The EIA’s market sentiments last month, which forecasted an average WTI price of $54/bbl for

Canadian River................42......... Q4 2017.................................12.67%

Basin focus.

2019, are moderately more optimistic than the NYMEX futures prices observed on January 2,

King River........................50......... Q1 2018............................... 12.32%*

*annualized

2019, with WTI crude oil prices expected to be about $7/bbl lower than Brent prices in 2019.

2019 for the next 12 months: Strip Jan. 2, 2019

MDS Energy

NYMEX Contract Month

MDS distribution summary—August 2018 distribution

Feb. 2019 .................................................. $47.24/bbl

Partnership Month %

Total # of May Total % Annualized Distributions Pricing Cash on Cash % Cash on

SPRING 2019

Dec. 2019 .................................................. $50.28/bbl While OPEC is positioned to continue output-related cooperation, the U.S. shale industry

MDS 2017 .................................. 0.59....................... 2.......$2.40................... 1.22............... 7.32

continues to drill wells and to increase oil production at an alarming rate. For 2017, the EIA

MDS 2016, 7.5% discount............ 1.85....................... 6.......$2.26..................11.62............. 23.24

forecasted oil production to average 9.2 million bbls per day, which was materially consistent

MDS 2016 .................................. 1.71....................... 6.......$2.26..................10.75............. 20.55

with the 9.4 million bbls actually produced that year. In 2018, however, actual U.S. oil production

MDS 2015, 7.5% discount............ 1.41..................... 19.......$2.23..................34.85............. 16.98

exceeded the EIA’s forecast by a significant percentage (i.e., 11 million bbls per day actual vs.

MDS 2015 .................................. 1.31..................... 19.......$2.23..................32.24............. 15.70

EIA’s 10 million bbls per day forecasted).

Observation: Better gas pricing reflected within recent distributions.

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July 2019 .................................................. $49.00/bbl

MDS 2017, 7.5% discount............ 0.64....................... 2.......$2.49................... 1.32............... 7.91

MDS 2014 .................................. 0.89..................... 31.......$2.24..................24.24............. 10.71

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Contract Price

While OPEC is positioned to continue output-related cooperation, the U.S. shale industry continues to drill wells and to increase oil production at an alarming rate.

Presently, U.S. oil production is 11.7 million bbls day, which the EIA expects will continue to increase in 2019 (i.e., 12.1 million bbls/day average forecasted by the EIA).

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Despite an oil price drop in Q4 2018, in which we saw prices decrease from $70/bbl on October

TABLE I — Break Even Field

2, 2018 to slightly under $50/bbl at year-end, the U.S. rig count increased by about 2.94% over Break-Even/BBL

such period, with Baker Hughes reporting 1,083 land rigs in operation as of December 28, 2018

Midland-Sprayberry/Wolfcamp $32 Eagleford Oil

compared to 1,052 land rigs in operation as of October 5, 2018.

U.S. oil production appears to be moving in the same direction as the rig count, with the U.S.

$36 - 42

production increasing from 11.1 million bbls/day at the end of September 2018 to 11.7 million

Bakken/Core $36 Delaware-Wolfcamp/Bone Spring

$37 - 43

N. Central Oklahoma STACK

$35 - 40

Eagleford Condensate

$45 - 47

Cental Oklahoma SCOOP

$40 - 50

bbls reported in late December 2018 (i.e., 4.4% production increase reported Q4 2018).

Despite lower oil prices, there are a select number of fields in the U.S. where oil can be produced at lower $30-50/bbl prices.

Not surprisingly, the break-evens of the fields tend to correlate positively with the areas of the U.S. where rig activity continues to be very high.

A summary of this correlation can be observed within the tables at the left.

Bakken/Non-Core $50 Raymond James Equity Research

Natural Gas – As reported by the EIA, natural gas inventory in the U.S. stood at 2,725 bcf on December 21, 2018, 18% below the natural gas inventory reported a year ago, and 19% below

TABLE 2 — Rig Activity

Field

Rigs Rigs Dec. 28, 2018 Year Ago

the five-year average.

Change

Despite lower inventory, natural gas futures prices remain consistent with market prices

486

398

+22%

observed since 2015:

Eagleford (S. Texas)

80

70

+14%

Strip Jan. 2, 2019

Cana Woodford (Central Oklahoma)

59

73

-19%

NYMEX Contract Month

Bakken Shale

56

47

+19%

Feb. 2019 ................................................. $2.95/mcf

2013..... $3.73 2016......$2.52

July 2019 ................................................. $2.70/mcf

2014..... $4.37 2017......$2.99

Dec. 2019 ................................................. $2.90/mcf

2015..... $2.62 2018......$3.16

Permian (Midland/Del. Basins)

Baker Hughes Rig Count

Natural gas price average Contract Price

—past six years

We note that despite the natural gas prices observed within the mainstream market, it is important to also consider circumstances that cause local natural gas prices to deviate from the main market. Such facts and circumstances include gas supplies in an area and the area’s ability to carry the supplies to market (i.e., takeaway capacity).

Areas of the U.S. where most of the domestic natural gas is produced include Appalachia (Marcellus/Utica), 31,037 mcf/day, Permian Basin, 9,721 mcf/day, Haynesville Shale Play (E. Texas and W. Louisiana), 9,721 mcf/day, Anadarko Basin (STACK/SCOOP Plays), 7,535 mcf/ day, and Eagleford Shale Play, 7,206 mcf/day. Coincidentally, areas of high production can

We note that despite the natural gas prices observed within the mainstream market, it is important to also consider circumstances that cause local natural gas prices to deviate from the main market.

experience bottlenecks in gas takeaway capacity from time to time. This truism has played out, historically, in Pennsylvania, the core of the Marcellus Shale Play, and most recently in the Permian Basin, which accounts for over 40% of the rigs operating in the U.S. While substantial natural gas differentials were experienced in the Marcellus Play a couple of years ago, the addition of transmission infrastructure has reduced gas price differentials from $1 per mcf and higher in 2015-2017 to about $0.40 per mcf today. Based upon DTI gas pricing, the pricing differential expected for gas produced in eastern Pennsylvania that is purchased by Dominion Energy Transmission, Inc. is expected to average $0.47 per mcf in 2019 (Source: CME

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futures), which is again lower than the differentials observed 2-3 years ago.

sponsor’s portfolio of programs performed quite well in the 2000-2005 vintage years when oil

Unfortunately, higher differentials are being experienced by operators that deliver their natural

was $20-$50 bbl and when commodities were generally on a more stable ground. Thus, there

gas to the Waha Hub in Pecos County, Texas, which currently services the Delaware and Midland

may be market upside left to capture within plays that have diverse commodities streams and

Basins. At this time, the pricing differential for gas delivered to the Waha Hub is expected to

good avenues to markets.

average about $1.50 per mcf in 2019, with higher differentials close to $2 per mcf expected in

While the media continue to favor West Texas in terms of economics, remember that there are

Q1 2019. While infrastructure projects are planned for the area, media sources are projecting a

core and non-core areas in all popular plays. This is another area where the value of independent

12-month period before the positive effects of the projects are realized. While the presence of wet

project underwriting comes into play.

gas helps to bump the effective natural gas prices realized by some operators in the Permian, we would suggest the financial modeling of lower gas prices for at least 24 months in this area as a best practice.

Market Pricing Summaries

Summary

Oil Spot Price (1/2/18)..............................................$47.34 (2018 avg. was $65/bbl)

As we predicted a year ago, retail energy capital raise numbers displayed growth in 2018, and we continue to

NYMEX Gas (Feb. 2018 deliveries)...........................$2.95 mcf (2018 avg. was $3.16/mcf)

believe that 2016-2018 could be good vintage years for the group of retail sponsors that raised capital over

Nymex Futures 2019/oil...........................................$47-50 per bbl (CME 1/2/19)

the past couple of years in terms of performance. A smaller but better group is reestablishing the market.

NYMEX Futures 2019/gas........................................$2.70-3.01 mcf (CME 1/2/19)

While capital raise numbers have yet to reach the levels of capital raised five years ago, the “foundation for

DTI Avg. 2019 Differential.........................................$0.47 per mcf (CME 1/2/19)

growth” continues to be on better ground than what we had years ago in a promoter-infested environment.

WAHA Avg. 2019 Differential....................................$1.50 per mcf (CME 1/2/19) ILL/Countrymark Differential (12/18).........................$7 per bbl (preferred pricing terms available

for certain operators based upon volumes)

What Makes Sense in 2019

On a final note, we believe it is noteworthy to mention the findings of a recent article we came across that highlights the continuing and irresponsible use of leverage by many public and private upstream companies in the U.S. The source places the debt at $280 billion U.S., with 90% of the debt being attributed to shale oil producers. Using break even prices quoted by certain of the public companies, the source estimates that the upstream industry will spend $20 billion this year in covering interest payments, which accounts for 1.5 million

While pricing fundamentals remain a wildcard for 2019, there continue to be areas in the U.S.

of the U.S. daily oil production. More alarming, the source estimates the production burden to pay off the

where oil/gas can be developed economically. Notwithstanding, cautious underwriting practices

leverage at 9 billion bbls, which equates roughly to what the U.S. upstream industry produced over the past 10

are key, as it is important to understand the break-evens of projects given their locations and corresponding challenges. Pro formas must factor relevant commodities pricing discounts based upon local supply/demand and available infrastructure. Additionally, special cost related considerations, such as water disposal, sponsor/manager compensation, and load, must be built into the economic underwriting models. With your assistance we have largely eliminated

years. On a better note, we mention that that limited leverage is being used today by the operators that raise money for drilling from retail investors, which generally bodes well from a due diligence perspective.

Word to the wise-don’t be too quick to approve the unproven sponsor and stay disciplined on due diligence.

Underwrite, underwrite, underwrite.

abusive turnkey structures and excessive management fees, but in 2018 our petroleum engineers identified several deals with aggressive and unobtainable assumptions.

As we encouraged last year, more of our client base is looking to minerals and royalties as potential opportunistic assets.

As stated last year, and in respect to programs that are taking a non-operated working interest in projects, look for opportunities where the project developers have proof of concept and strategic alliances with major companies/investors. As to drilling focused programs, we need to continue to convince most of the drilling sponsor group that capital deployment over multiple years makes sense. Those that drill over multiple years do better.

As we encouraged last year, more of our client base is looking to minerals and royalties as potential opportunistic assets. This was demonstrated by a noticeable uptick in the capital raised to purchase mineral assets in 2019. Looking back at the prior performance history of a certain sponsor that dominated the royalty segment of the asset class for years, it is noteworthy that this

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By: Matthew Iak, Executive Vice President,

U.S. Energy Development Corporation

Around the Industry Update Q&A

Taylor Garrett, Managing Director, Mountain Dell Consulting

Mike Huisman, Senior Director, Digital Operations, DST Systems

as oil and gas companies both public

for their services before the commodity price even begins to

gas industry today, with fewer exploration projects to find and

and private have increased their focus

move, all in anticipation of a higher price. Compare this to

replace current reserves, we share the same viewpoint as

on capital discipline and productivity

where we are today as the volatility in pricing helps to keep

several major financial institutions (Goldman Sachs) that this

improvements.

in

oil and gas markets competitive, and that is a huge benefit

is likely to result in a dramatic oil supply shortage which could

approach bodes favorably for the

to our direct investors. Additionally, investors in direct oil

also create a surge in oil pricing in the not too distant future.

health and stability of the sector and will

and gas investments can sometimes forget that they won’t

This

change

Q. Oil & gas had what many would call a

help to ensure future profitability even

receive income based on oil prices today, but instead they

during periods of low breakeven prices.

receive income following the drilling and completion process

Just this year, improved financials coupled

and once the wells go into production, which can be six to

with technological advancements in drilling

twelve months after investment. It’s almost a double-win for

techniques have led to a surge in new drilling

direct oil and gas investors: They receive a big tax deduction

A. Several factors are behind the recent resurgence in

domestically, especially in the sought-after regions of

now and can let the market steady over the next 12 months.

direct energy investments this year. In addition to all of the

the Permian Basin and Eagle Ford Shale in Texas. In 2018,

The lower pricing also allows us to explore additional hedging

favorable market factors discussed above, from a capital raise

the United States has become the world’s largest producer

opportunities and potentially create other efficiencies by

standpoint, tax reform from the Tax Cuts and Jobs Act (TCJA)

of oil for the first time since 1973, surpassing oil-producing

incorporating additional technologies.

has spurred additional interest and new investments. First,

powerhouses Russia and Saudi Arabia. In fact, the state of

resurgence recently—what helped shape that industry trend?

not only were the tax-favored treatment of direct oil and gas

Q. Where do you see oil & gas headed in 2019?

A. At some point in the near future, whether that be in 2019

investment preserved in tax reform (notably this includes the

While more recently we’ve seen a drop in oil pricing, this

or soon thereafter, the lack of CAPEX (or capital expenditure)

investments as many of the tax deductions clients have relied

too bodes favorably for the immediate future of direct oil and

for new oil and gas projects is going to create a global oil

on for years were reduced and/or eliminated with the TCJA.

gas investments for several reasons. While it can be difficult

supply shortage. Between 2014 and 2016, we witnessed a

This has resulted in increased demand for oil and gas Drilling

sometimes to see ‘the forest through the trees’ when it

global decrease in oil and gas capital expenditure by 44%.

Funds which provide a tax deduction in the year of investment

Q. How has 2018 fared for oil & gas?

A. 2018 has been a strong year for oil and gas direct

comes to making an investment decision, in this style of long

It’s estimated that nearly $1 trillion in exploration budgets

right up until midnight on December 31st. U.S. Energy has

term investment volatility in pricing during the capital raise

which would bring new supplies of oil and gas to market were

been extremely proactive this year in the development of

period can be extremely beneficial to investors. Most notably,

lost. Add to that, exploration projects to find new sources

additional advisor tools, educational programs and advanced

investments as improvements in the underlying health of the

price volatility helps to keep a lid on operational costs. In

of oil and gas reserves have dropped from 19% to 12% of

tax planning strategies focused around the tax law changes,

oil and gas market continues to benefit the long term outlook

situations where the underlying belief is that oil prices are

total wells in just the last 6 years. While in some ways this

which has allowed advisors to attract new high net worth

moving higher, we’ve seen outside firms increase the cost

demonstrates the prudent financial discipline of the oil and

clients or build upon their current book of business.

Texas alone is on track to produce more oil than either Iran or Iraq by 2019, which would rank Texas as the #3 producer in the world if it were a country.

Oil & Gas From Matthew Iak, Executive Vice President, U.S. Energy Development Corporation

of the sector. Over the last five years, we’ve seen a transition

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Intangible Drilling Cost Deduction and Depreciation Deduction) but advisors have seen an increased need for oil and gas

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Q. Which product structures have been the

most successful recently, and which do you expect to continue, or rise, in popularity?

A. In 2017, approximately 70% of the capital raise for

in our space and is creating leaps in the areas of safety, production, operational excellence, predictive maintenance, transportation and more. For example, we are witnessing drones gather inspection data in a week versus the 2 months it can take for a team of technicians to do it. Today a COO

between 20-40% growth over the past six years. We anticipate the lower end of that for 2019.

Q. Are there any industry shifts you expect

up, companies are relying more and more on data for answers and direction. Sponsors are meshing all types of data to learn more about advisor’s selling patterns and are looking to gain insight on where and when to introduce their products.

direct oil and gas investments came in the form of traditional

can use their phone to view an individual well’s production

Drilling funds with the remaining 30% of capital raise coming

chain and detailed cost data just as the on-site team sees it.

from minerals and opportunity-style funds. (Source: Mick

Screens are used to monitor a two mile well as it is drilled,

Law P.C., LLO)

While we expect demand for Drilling Funds

and the slightest deviation from its “sweet spot” is captured

to remain strong, and maybe even be a little inflated for the

immediately and adjustments occur “on the fly”. Even the

next few years as high net worth investors look to replace

difficult question of “where to drill and how many wells?” is

tax deductions they are losing from the TCJA, long term we

made easier by leveraging historical and real-time data from

see Opportunity-style funds becoming more mainstream.

the well site. Deep analysis of wells in similar formations are

While we believe the tax planning advantages that come

used to quickly discover best-performing wells with similar

with a Drilling Fund that offers a significant tax deduction in

characteristics to minimize drilling issues and optimize well

the year of investment will continue to be the cornerstone of

completion. The automation benefits ultimately help make

financial planning for top advisors and high net worth clients,

for a better investor experience as well. A recent oil and gas

Opportunity funds can provide a larger segment of investors

report by a leading management consulting firm (McKinsey)

with ownership in a wide range of energy assets which

suggests that the effective use of digital technologies could

provide income and tax diversification. U.S. Energy has raised

reduce capital expenditures by up to 20%. I don’t know of

over $100 million in these Opportunity-style funds over the

any firm who would ignore those numbers, and our investors

and single tenant is in second place to that. I think we will

last several years and as more Broker Dealers, Advisors and

deserve to see those efficiencies. The 2014 experience when

start seeing the products I mentioned above.

Investors become accustomed to this offering structure and

oil collapses roughly 75% was not a great one for any of

I think we are going to start seeing some larger, well

the income potential, we expect to see additional demand in

us in that moment. However, that period forced firms to

capitalized sponsors enter the space. We like the quality of

the coming years.

modernize, to invest in technologies, and this overhaul in

sponsors that are entering the space. We’ve come a long

approach is a primary reason why we feel that our space is

way in the 17 years we have been tracking the market. We

poised for unprecedented success.

worked last year or today will work in the future. Firms need

like the direction it is going and hope to see strong operators

to continue refining their logic and insight as more, and

enter the space.

different, data is made available.

Q. What role does technology play and what

impact will it have in the oil and gas world today?

A. The perception that oil and gas companies are not keeping up with embracing the automation capability that technology brings couldn’t be further from the truth. For years the industry was likely slow to change or invest in new technologies because it didn’t have to likely due to its wealth.

Sustained high prices and a consistent inflow of capital allowed companies to hide their inefficiencies. That narrative has changed and technology is viewed very differently by today’s leaders as more companies are forced to operate with an “innovate or die” mentality, and, as with our firm, investors are demanding it. Technology is having a profound impact

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A. We still anticipate moderate growth. We have been

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SPRING 2019

to see?

A. Interest rates have moved up with cap rates staying somewhat still. As such, cash flows have moved down a bit.

We are starting to see more products outside of the traditional apartment sector such as student housing and 55+ housing.

We are also starting to see some other product types come back to the space such as multi-tenant office, medical office, multi-tenant retail and even some hotel deals.

Q. Which property types are the most

popular? Which are expected to gain in popularity, and why?

A. Apartment types are still 60+ percent of the market

Syndicated Like-Kind Exchanges

By Taylor Garrett, Managing Director, Mountain Dell Consulting

Q. How has 2018 fared for 1031 exchanges?

A. It looks like we will hit between $2.3-2.35 billion in equity raised.

Q. What do you think the 2019 outlook is

for 1031 exchanges?

REITs/BDCs

By Mike Huisman, Senior Director, Digital Operations, DST Systems

Q.

Q. How do you think big data will affect

alternative investments in 2019?

A. I think we will continue to see more advancement in how quickly data is made available to identify unique sales signals. The markets have become very competitive and any advantage a firm has, could be the difference between success and failure.

Q. Are there any major trends shaping up

financial services software?

A. A major trend impacting financial services software is more information and data is being pushed into CRM systems so the power of all that data can work for the sales team.

Q.

Are there any big pitfalls for which ADISA members should be on the lookout?

A. Don’t just stand still and believe benchmarks that

Q. What new data and automation trends have helped attract new investors and advisors?

A. I think you will start to see people looking more at the relationships between different data variables to

How has big data affected alternative investments in 2018?

discover new investors and advisors. Understanding the

A. The alternative investments industry has been rapidly

education, hobbies and wealth segmentation will lead to

changing due to the introduction of new products and rising investor demand. In response and attempt to keep

unique relationships between individuals, demographics, identifying opportunities that have always been there but the combinations have not yet been explored or leveraged.

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ADISA

News

Events

2019 ADISA Board of Directors and Officers Announced ADISA Advocacy ADISA 2018 Annual Conference & Trade Show Wrap-Up

Advocacy Roundup ADISA Submits Comments Regarding FINRA 2018 Exam Findings (January 2019)

Securities in response to the state’s uniform fiduciary standard

ADISA responded and provided feedback on the 2018

was co-signed by ADISA, SIFMA, the IPA, Financial Services

Examination Findings issued by FINRA last month. ADISA

Institute, Insured Retirement Institute, NAIFA, New Jersey

routinely submits comment letters and related submissions in

Bankers and ACLI; and highlighted these problematic

response to industry-related initiatives undertaken by regulators

aspects of the state’s proposal:

at the federal and state levels, and engages in frequent

• The active federal activity in pursuit of an enhanced

dialogue with legislators and regulators in order to supply them

standard of care for broker-dealers.

with useful information about alternative investments and their use in client portfolios.

2019 ADISA Board of Directors and Officers Announced Back in the fall of 2018, ADISA members elected new

Matt Malone, FS Investments

directors for its 2019 board. ADISA holds democratic

Greg Mausz, Preferred Apartment Communities

elections hosted by a neutral online vendor, and the elections are open to all member categories (with a maximum of three votes per firm).

The eight newly election (or re-elected) board directors are: Brandon Balkman, Orchard Securities Brian Buehler, Triton Pacific Securities Sherri Cooke, AI Insight John Grady, DLA Piper Jean Merriman, The Strategic Financial Alliance (SFA) Joe Michaletz, Discipline Advisors

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sense of what the organization is seeing in the course of its examination program, the report could be further enhanced by clearly prioritizing or characterizing its observations, as well as

Brad Updike, Mick | Law

identifying the standards FINRA used in determining whether

Tom Voekler, Kaplan Voekler Cunningham & Frank

to include an observation in the report.

Darryl Steinhause of DLA Piper also serves as a

• Within the topics covered, ADISA believes that it would

non-voting, volunteer legal counsel.

prove useful for FINRA to include information about potential

Furthermore, at its first meeting of the year, the new ADISA Board selected its 2019 officers. Greg Mausz of Preferred Capital Securities began his term as the 2019 ADISA president (having been elected president-elect in 2018), and

Larry Sullivan, Passco Companies

president-elect and will serve as president in 2020. The other

Andrew Barnum, Cetera Financial Group

• While the report will provide FINRA members with a

Kurt Tesh, Kalos Financial

Larry Sullivan of Passco Companies was elected as the 2019

were elected last fall to two-year terms, and include:

which include:

Ann Moore, International Assets Advisory

Vali Nasr, Claraphi Advisory Network

They join the returning 2018 board members, who

ADISA had a number of enhancement suggestions,

solutions or steps that members used or may use to address shortcomings and other problems observed.

duty would face.

• The problematic nature of state-specific fiduciary standards.

ADISA Co-Signs Letter in Support of the Invest in American Act (November 2018) ADISA joined major housing and real estate organizations in co-signing a letter to Congress in support of the bipartisan Invest in America Act (H.R. 6726) introduced by Representatives Kenny Marchant (R-TX) and Joseph Crowley (D-NY), which would repeal the Foreign Investment in Real Property Tax Act (FIRPTA).

FIRPTA is a major obstacle to capital formation and investment in U.S. commercial real estate and infrastructure.

• ADISA also believes that providing greater clarity around

It discriminates against real estate by subjecting foreign

FINRA’s standards used for including an observation in the

investors to U.S. capital gains tax on their sale of U.S. real

report would lead to fewer instances of the report’s conclusions

estate and infrastructure.

being “sensationalized” in the press and elsewhere.

Furthermore, a recent study, by University of California,

• ADISA also suggested that the report explore the linkage, if any,

Berkeley professor and economist Ken Rosen estimates

Securities as vice president; Ann Moore of International

between FINRA’s beginning-of-year examination priorities and

FIRPTA repeal would generate 147,000-284,000 new, well-

Assets Advisory as secretary; and Mark Kosanke of Concorde

observations made in the course of a calendar of examinations.

paying jobs in the United States by spurring greater inbound investment in U.S. real estate and infrastructure.

Investment Services as treasurer. Keith Lampi of Inland Private Capital Corporation, ADISA’s 2018 president, will serve the Board

Mark Kosanke, Concorde Investment Services

as its immediate past president. Additionally, Susan Kelly of

ADISA Continues Efforts on New Jersey Fiduciary Rule (December 2018)

Prior, collective efforts on FIRPTA reform resulted in bipartisan bills that were cosponsored by 90% of the members of the tax-writing committees.

Keith Lampi, 2018 ADISA President,

Commonwealth Financial Network was also elected by the

ADISA joined major financial services trade associations as

Inland Private Capital Corporation

Board to serve as a director for a two-year term.

signatory to a letter to the chief of the New Jersey Bureau of

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• The significant pre-emption hurdles any state-level fiduciary

ADISA officers selected were: Brian Buehler of Triton Pacific

Catherine Bowman, The Bowman Law Firm

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pre-proposal. The most recent letter, dated December 14,

The Invest in America Act would build on recent progress.

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ADISA 2018 Annual Conference Sets Record Attendance with Opportunity Zones, 1031 Exchanges and Earvin “Magic” Johnson at Top of Program ADISA’s 2018 Annual Conference & Trade Show, held October

• The Distinguished Service Award was presented to two

8-10 in Las Vegas, drew more than 1,000 attendees from

individuals, Dave Laga, chief financial officer and director

the alternative, direct investment space for the association’s

of due diligence of DFPG Investments, and Brian Buehler,

largest conference to-date.

partner with Triton Pacific Investment Corporation.

“ADISA’s 2018 Annual Conference & Trade Show was full of energy and excitement as leaders in the alternative investment space met to discuss the latest trends and learn about products and regulatory affairs,” said John Harrison, executive director of ADISA. “NBA legend and Naismith Memorial Basketball Hall of Fame inductee Earvin “Magic” Johnson delivered a fantastic keynote address, where he shared his entrepreneurial story and entertaining anecdotes about his career. We thank everyone who participated in the conference and are looking forward to a successful 2019.”

The conference included approximately 40 educational sessions covering qualified opportunity funds, Section 1031 exchange investments, private equity, energy, conservation easements, legislative and regulatory updates, real estate investment trusts, business development companies and more. The agenda included four sessions with FINRA and state regulators in attendance.

Conference attendance was evenly split between two primary industry groups—product sponsors and affiliates, and broker-dealers, RIAs and financial advisors. Additionally, ADISA’s post-conference survey results indicated a 4.5 out of 5 in overall satisfaction. The number of exhibitors grew 14 percent from the association’s 2017 Annual Conference & Trade Show with approximately 80 exhibitors overall.

The conference kicked off on Monday night as ADISA announced the 2018 winners of its A Champion of Excellence (ACE), Distinguished Services and President’s awards.

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Annual Conference Keynote Speaker Earvin “Magic” Johnson, named a street “ADISA Way” in a new subdivision in North Texas in honor of ADISA. MCI presented ADISA with the plaque before Magic took

partner with DLA Piper.

the stage on the last day of ADISA’s

At the industry update general session, Taylor Garrett with

Annual Conference & Trade Show in Las Vegas.

Mountain Dell Consulting reported that the Section 1031 exchange investment industry has raised nearly $1.9 billion in equity through the beginning of October 2018 and is on track to raise approximately $2.4 billion by year-end. The market is raising approximately $6.7 million per day and the expected yearly total will be a 23 percent increase from 2017. There are 35 active sponsors year-to-date in 2018, up five from 30 active sponsors in 2017.

Qualified opportunity funds, a new entrant to the alternative, direct investment space as a result of the Tax Cuts and Jobs Act of 2017, were covered in two sessions during the conference. Qualified opportunity funds capture private equity that flows into new Opportunity Zones and are designed to incentivize investment capital into designated census tracts nationwide. Greg Genovese with Sound West Realty Capital said, “Qualified opportunity funds can help move billions of dollars in unrealized capital gains from almost

CLOCKWISE FROM UPPER LEFT:

any source, including stocks, mutual funds and real estate,

• The ACE Award was posthumously presented to John Williams, co-founder and former chief executive officer of Preferred Apartment Communities.

off the sidelines through generous tax incentives and into communities designated as ‘Opportunity Zones.’”

Mainstreaming alternatives expert Bob Rice, author of The Alternative answer: The Nontraditional Investments that Drive the World’s Best-Performing Portfolios, provided the closing guest speaker address. Rice drew upon his more than 30 years of experience as a lawyer, banker and consultant for

Williams, co-founder and former chief executive officer of

institutional investors, asset managers and financial advisors

Preferred Apartment Communities.

to discuss investing in non-traditional asset classes.

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MCI Megatel, the sponsor of ADISA’s

• The President’s Award was presented to John Grady,

• The ACE Award was posthumously presented to John

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Megatel Names Street After ADISA

• The Distinguished Service Award was presented to two individuals, Dave Laga, chief financial officer and director of due diligence of DFPG Investments, and Brian Buehler, partner with Triton Pacific Investment Corporation.

• The President’s Award was presented to John Grady, partner with DLA Piper.

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10401 North Meridian Street Suite 202 Indianapolis, IN 46290

JULY

18 - 19

THE MAYFLOWER HOTEL WASHINGTON, D.C.

ADISA 2019 AI RESEARCH & DUE DILIGENCE FORUM OCTOBER

14 - 16

THE COSMOPOLITAN OF LAS VEGAS

ADISA 2019 ANNUAL CONFERENCE & TRADE SHOW

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